The S&P 500 pushed 1.75% higher in the past week and finished Friday at a new record high. With that close the S&P 500 recovered from the significant drop that began from the previous record close of 2117.39 on March 2. The index pushed to this record close as the constituents are reporting earnings at the lowest levels in eight quarters.
It took 15 years, one month and 13 days for the NASDAQ recover the March 10, 2000 highest close after the Internet tech bubble burst in 2000. The NASDAQ set a new highest closing mark on Thursday and increased it with a gap higher on Friday. It has so far fallen short of the all-time high of 5132.52, the intraday high seen on March 10, 2000. This run could be on another tech bubble; this time in Biotech as it appears valuations of many of these companies are far forward of likely earnings increases.
The Major Stock Market Indexes
The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 show most of the indexes climbed slowly back into resistance levels they had fallen from during the previous week. Although three finished the week at new highs, all of the indexes finished within or near prior resistance levels.
The NASDAQ finished all five sessions higher on its way to a record high in the past week. The NASDAQ pushed strongly back above the 13 EMA on Monday and a retreat on Wednesday rebounded above the 13 EMA as it neared it. Friday’s gap higher traded in a narrow range, and the index finished well above the 13 EMA.
The S&P 500 finished four sessions with gains and capped the week with a record high close Friday. It pushed above the 13 EMA on Monday and Tuesday slipped back towards it, but held above the 13 EMA in the week’s only loss. Wednesday’s low slipped slightly through the 13 EMA before rebounding and the index built a gap above it in the week’s final two finishes.
The New York Stock Exchange also finished higher in four sessions pushing to a record close on Thursday and increasing it on Friday. It pushed above the 13 EMA Monday, slipped to a close above it in Tuesday’s setback and saw Wednesday rebound after breaking slightly below it. It saw the final two finishes build a gap above the 13 EMA.
The Russell 2000 moved higher during the week with gains in three of five sessions, but failed to recover the losses in the previous Friday’s retreat. The Russell rebounded quickly back above the 13 EMA on Monday and closed above the barrier in each session, but broke below it during retreats on Wednesday and Thursday.
The Dow Jones pushed strongly higher on Monday, nearly recovering the previous Friday’s retreat before slipping to close lower. The daily highs appeared to find resistance near that drop point later in the week. Although the Dow finished the week with four gains and higher for the week, it fell short of recovering the previous Friday’s losses. The Dow pushed to a finish above both the 13 and 50 EMA on Monday, but slipped to finish below the 13 EMA in the week’s only loss on Tuesday. Wednesday fell slightly through the 50 EMA before rebounding to finish above both the 13 and 50 EMA. Thursday broke slightly below the 13 EMA before rebounding and the Friday low rebounded off the 13 EMA.
The indexes all finished the week higher, but most appeared to be fighting resistance into these gains. All are fully overbought.
The US Treasury Charts
The 20 year US Treasury Bond finished lower in the first three sessions before rebounding in the final two. The 20 Year slipped to a close slightly below the 13 EMA Monday and continued lower Tuesday before falling deeply below the 50 EMA Wednesday. The last two days of gains brought Friday’s high slightly above the 50 EMA, but it finished the session slightly below it. The 20 year fell into fully oversold conditions with the late week move barely moving it higher. It seems possible the 20 Year could continue to rebound higher, but this chart is beginning to show some possible bearishness.
If the current rebound in Treasuries continues, it could be bearish signal for stocks. Treasuries still appear to be overpriced though.
The interest rates on the 10 year US Treasury Note rebounded in the first three sessions before cooling in the final two. The Ten Year pushed to a close at the 13 EMA Tuesday before breaking above it and moving to a close above the 50 EMA Wednesday. Thursday slipped to a close back below the 50 EMA and Friday finished slightly below the 13 EMA. A sell off spurred by news of a possible Greek settlement sent European bond rates higher during the past week, although yields are still far below the US Ten Year Note; it allows the ECB to start buying them again. The positive rates with the possibility that the ECB could again drive these rates lower and bond prices higher could keep Euro investors at home. The Ten Year Rate is near fully overbought levels, making a continued fall seem possible.
Gold bounced slightly higher Sunday night reaching a high of about 1206. It retreated shortly after the Hong Kong open and fell into the night’s finish a little short of 1204.
Monday pushed higher to 1208, but turned lower at the London open. The fall continued to about 1191 in New York before beginning a slow trend higher. The trend turned lower at about 1197 in Sydney and retreated to about 1193 shortly after the Hong Kong open. Gold turned higher off that low to finish the night a little under 1196.
Gold rounded lower Tuesday in a drop back to 1193 at the London open. It turned higher in London, pushing to 1202 just before the New York open. It turned lower in New York, falling quickly to 1194, but rebounded off that low to reach 1203. Gold flattened near that high before trending mostly lower into the day’s 1199 finish.
Wednesday saw gold bounce between 1198 and 1204 until a rebound failed after the New York open. It slipped below 1198 briefly before turning steeply lower in a fall to about 1186. It bounced higher then cupped slightly lower in the next retreat. It rebounded slightly into the Hong Kong open, but turned lower to 1184 early in trading there. Gold rebounded to finish the night above 1188.
Gold pushed to 1189 Thursday before falling to the day’s low of 1185 near the London open. Gold bounced mostly higher reaching 1198 in New York before trending slowly lower into the day’s finish above 1191.
Gold moved higher Friday, pushing above 1195 by the London open before turning lower. The drop held flatly near 1188 until turning steeply lower to 1178 in New York and then continued slowly lower to 1175. Gold trended slowly higher into a New York Spot close of 1178.90 and quite a bit lower than the previous week’s New York Spot close of 1203.30.
Gold again slipped below 1190. Although there appears to be little reason for stock prices to continue higher, the markets do not always move in the direction that common sense should take them in. Therefore this move below 1190 seems potentially bearish.
The S&P 500 Constituent Charts
A fairly large number of constituents have moved back to or near highs seen in previous rebounds. Some have pushed above these highs near previous tops breaking above resistance in these moves. Most have since retreated making this move seem fleeting, but continued breaks above resistance could be bullish.
Many have stalled in climbs near these highs and have traded sideways at these resistances. Some appear to have reason to move higher, but many do not. Others appear to be rounding lower after reaching resistance near these highs.
Many stocks appear to be high in their cycles, but not all stocks are moving higher. Some retreated and some fell through support levels in these retreats. Some of these stocks had turned lower from previous cycle highs earlier. Some also continued lower from previous support breaks.
Many stocks that are high in their cycles are fully overbought, but many stocks that retreated are fully oversold. Overall the charts do not appear to show clear direction. Some are showing bullishness, others bearish weakness.
Although the index moved to a new high, few indicator stocks signaled the move higher. Several rebounded near previous highs that they have turned lower at previously, but few moved above these highs.
After slipping each week for nearly the first four months, the constituents of the S&P 500 saw the year’s first weekly increase in the current year earnings projections this past week. The current year estimates increased $17.45 on an even weighted basis. The increase was partly due to a switch from fiscal year 2015 to fiscal year 2016 earnings for constituents that reported fourth quarter earnings of their fiscal year during the week. Even though this change helped increase current year estimates, many of these constituents saw the 2016 fiscal year estimates slip with their reports. It therefore seems possible this past week’s increase could be temporary.
Investors appear to be falling for the manipulated earnings beats. Many are beating earnings estimates, but many saw prior decreases in excess of ten percent on the projections they beat. Several saw projections fall by over 50% in the two months prior to “beating” the estimate. Investors appear totally oblivious to the reductions in year over year and quarter over quarter earnings, simply trading stocks higher because they beat estimates.
Even though many are beating drastically lowered earnings, earnings are not very good for the quarter. Based on the current constituents’ even weighted past earnings along with the current earnings and estimates of those yet to report; the first quarter earnings are on course to record the first double digit percent decline in quarter over quarter earnings by the current constituents since the fourth quarter of 2009. If those that have not yet reported come in line with the current estimates, the first quarter’s earnings will be the lowest total earnings the current constituents have reported in eight quarters. This reduction follows over a 4% slide in quarter over quarter earnings seen in current constituents during the previous quarter. Some constituents are doing well with earnings, but most are doing poorly.
The good news is next quarters projections are not as lowly, but the projected rebound is small so they are far from lofty either. If the current constituents can meet these estimates without seeing another large decrease in projections prior to reporting, they could report only the fourth lowest quarterly total in the past eight quarters. Even so the two quarters could combine for the lowest consecutive quarterly total since the first and second quarters of 2013. That could nearly wipe out two years of earnings increases on the index. At the same time the index is moving to new highs.
These decreases are widespread; even many in the “hot” sectors of health care and information technology are seeing large decreases. Several that had given very rosy guidance earlier have since pulled back on the reins. Many of these companies still beat or met expectations at the time of their reports, but many also reported earnings in excess of 10% lower than earlier guidance. Several companies are still showing earnings growth, but many of these companies have seen large decreases in earnings due to currency exchange rates. As a result growth is very small and in many cases well in excess of 10% lower than what was expected in June 2014.
If stock prices hold steady and earnings come in even with the current projections, it seems possible the constituents could begin the third quarter with an average even weighted P/E nearing 30. The problem is, based on current and projected economic conditions; it seems likely many companies could have difficulty making the current earnings projections for the second quarter. This makes it seem likely the projections could slip before these earnings are reported, just as they had in the two previous quarters. Overall stocks are not cheap; most appear to be very expensive.
The current conditions are currently bullish for longer term earnings growth, making a rebound in earnings look likely if these conditions continue. This earnings rebound is historically slow to develop though, and probably further out than many expect. In the meantime many could see continued earnings shortfalls before this earnings rebound begins, pressuring the overall earnings of the index. It could take some time for overall earnings to regain these losses. This tends to make current stock prices seem too high for these likely future increases. Higher P/E’s than the index currently has have been seen in the past, but most of these higher P/E’s were seen into an earnings slide like that currently being seen on the index.
The indicators featured below are not always correct, but they have been many times. Being so they are worth reading about and taking note of.
The +2% L, -2% L, 100 L and –/(+) 90 D indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The +2% L and –2% L indicators did not provide a correct indication in the past week. The expiration of the 90 E and recovery from the significant drop lowers the likelihood of daily volatile moves. As a result these indicators fell to a low level. If no volatile conditions are seen in the coming week they will become dormant.
The –/(+) 90 D indicator that became active on Feb 26, 2015 has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.33% / -3.34% / +0.33%
The 90 E expired with Wednesday’s close. Although the index saw a significant drop and two price directions changes during its presence, it did not act as bearishly as supporting indications suggested. These indications continue to suggest bearishness, but the index has so far moved higher against these indications.
Although most supporting indicators remain bearish, the reduction in active indicators is generally a bullish indication. If no volatile moves are seen in the coming week the numbers of active indicators could dwindle further. Even if all other indicators become inactive, the –/(+) 90 D indicator will remain active and continues to show bearish traits.
Monday started at the session low of 2084.11 in a gap higher and continued to a high of 2103.94 before slipping to a close of 2100.40. Tuesday opened higher at 2102.82 and continued to a high of 2109.64 before slipping lower to a session low of 2094.38, covering the opening gap, before rebounding to finish at 2097.29. Wednesday opened higher at 2098.27, but covered this gap in a fall to the low of 2091.05 before rebounding to a high of 2109.98 and slipping into a close of 2107.96. Thursday opened slightly lower at 2107.21 and slipped to a low of 2103.19 before reaching a high of 2120.49 and slipping into a close of 2112.93. Friday again started slightly lower but at the session low of 2112.80, it pushed to a high of 2120.92 before settling to a lower close of 2017.69.
Monday’s opening gap higher went unfilled during the week. It found resistance above the likely resistance from 2085 to 2100 in the lower half of the 100 L before falling to finish slightly above this resistance. Tuesday’s high found resistance prior to the likely resistance from 2112 to 2125 in the upper half of the 100 L, before slipping and finding support within likely resistance in the lower level of the 100 L. Wednesday fell a little lower and pushed slightly higher but found support and resistance in the same resistance ranges as Tuesday. Thursday found support above the likely lower half resistance and pushed into the likely upper half resistance of the 100 L before falling to finish near the lower boundary of the likely resistance in the upper half of the 100 L. Friday held support at the lower boundary before pushing slightly closer to the upper boundary and finishing slightly above the March 2 previous high.
The week finished in a bullish trading pattern holding within the likely resistance from 2112 to 2125 in the upper half of the 100 L. It pushed slightly above the previous intraday high of 2119.59 and moved slightly higher above this resistance in the next session. It also held on to finish at a slightly higher new high. Resistance in the upper half of the 100 L still looks formidable though and the week started with an unfilled open gap higher. This gap is likely to be filled at some point, but it might not be filled quickly. A break above the upper boundary of the 100 L could be bullish, but it seems possible a break lower from this resistance could result in another significant retreat as many constituents are near pattern highs they have fallen lower from in past significant retreats.
The index recovered from the first significant drop from likely resistance between 2112 and 2125 in the upper half of the 100 L. Although not always the case, rebounds from significant drops that recover previous highs most often push past the resistance level and move higher to the next likely resistance. Resistance within the upper level of the 100 L still appears stout, so this continued rebound is not a given.
The average daily volume levels slipped 3.94% below the previous week. Monday saw the lowest volume and Thursday the highest. The five day volume variance decreased by 16.79% to finish the week at 21.22%.
A reader questioned if derivatives trading was really still a problem after Dodd-Frank. The amounts allowed to be risked have been reduced, but they are still at amounts that could cause problems. Until full reinstatement of the rules in the Securities Exchange Act of 1934 preventing banks from these types of trades, banks are at risk to provide another 1929 or 2008 type crash.
When you consider that the six holding the largest amount of derivatives liabilities are JP Morgan Chase (JPM), Bank of America (BAC), Well Fargo (WFC), Citibank (C), Goldman Sacs (GS) and Morgan Stanley (MS) and that all of these banks have seen huge losses due to their derivatives trading in the past, it seems like a potential problem. When you consider some still saw a huge loss even after the problem was “fixed” by Dodd-Frank, it seems like a potential problem. When you consider that they all hold Federally Insured deposits that are backing these trades, it really seems like a potential problem. That is why they had to be bailed out before. The fallout from that fiasco quadrupled the national debt.
Consider the precedence set in previous occurrences of wrong doing. None that had the legal obligation to oversee these actions were held accountable. None lost a cent of their own money, nor spent a minute in jail; instead investors footed the bill for their defense and paid the fines of those responsible. Since none were held accountable for their actions in the past, they are likely to do it again expecting the same outcome if something goes wrong.
According to the FDIC’s website, as of Dec 31, 2014 there were a total of $221.856 billion in active derivatives contracts. The “too big to fail banks” held $221.839 billion of that total. To view the report, follow this link, click on Retrieve Reports, and then click Run Reports on Standard Report #1. The totals for derivatives are found in row 54 of this report.
The value reported does not reflect the true potential of liabilities from losses on these contracts. They are reported at present fair value, but since they are derivatives; they could lose multiples of the value stated in this report. That was the problem in the last episode.
In abstract the circumstances surrounding the bailout make it seem possible the banks lied to Congress when they asked for a bailout. The FDIC reports show the banks were still making money on mortgage derivatives when they were asking Congress for that mortgage bailout. Just before the banks asked Congress for a mortgage bailout gold and oil prices dropped deeply. The FDIC reports make it seem possible the banks reported losses of $750 Billion in commodities derivatives trading just before asking for a mortgage bailout of, $750 Billion. There were a whole lot of other derivative asset sales made during the same quarter but it seems possible these sales were made in a mad scramble to try to cover those huge losses. The quarter before saw little activity in any of these assets sales and mortgage derivatives movement was minimal during the quarter under question.
When the banks went before Congress, unemployment was still near a five year low and the S&P 500 constituents were making record profits. There were not many foreclosed properties on the market at that time. In fact several Congressmen were having a hard time believing that the problem was as big as the banks made it out to be for that very reason. The excuse the banks gave was that these properties had not yet reach foreclosure, but were “troubled properties” that would likely reach foreclosure in the months ahead.
After Congress agreed to a bailout, foreclosure properties did skyrocket just like the banks said they would, but not until the banks began to illegally foreclose on thousands of mortgages to flood the market. It was reported the “Robo Signings” produced over 130,000 illegal foreclosures, for which the banks later settled a lawsuit filed by the States on behalf of wronged homeowners and paid $25 Billion in damages in the largest of several settlements.
There were several billions paid in other settlements stemming from those and other illegal activities during the mortgage meltdown. Yet none of those responsible paid a fine out of their own pocket, paid for their own legal defense, or spent a minute in jail for any of these illegal acts. Investors paid these expenses as they came out of corporate earnings, or increased debt.
Once the illegal foreclosed properties began to flood the market and valuations began to dive, a chain reaction developed. Many that were underwater became discouraged and simply handed the property back to the bank. Many were forced to move to find work in the ensuing downturn, but could not sell at a price to pay off the mortgage, leaving them upside down. The circumstances also forced them to walk away. The downturn also put many in trouble that were not prior to the downturn, further increasing foreclosures. The problem was further exacerbated by a large number of very wealthy landowners that could afford to pay for very expensive properties, but since they were underwater, walked away too. Many of these very wealthy landowners later recovered these same properties at a fraction of what they owed, giving these walkaways a very shady look too.
It seems possible Lehman Brothers collapse was the perfect cover up story, but not necessarily the cause of the financial downturn. Bad press in mortgage derivatives trading during Congressional hearings and later reports likely caused investor flight, increasing the problems drastically in the mortgage finance industry. Even solvent debt within the industry was being shed.
This is all conjecture on circumstantial evidence. Although the evidence makes it seem plausible, there is no smoking gun.
To many it might seem far fetched. Considering the financial dealings history of many involved even before the corrupt activities seen during this fiasco, including trading opposite of advice given to customers, knowing this advice would result in investment losses for customers while reaping large gains off this misguided advice, it might not be as far fetched as it seems. Frauds like these are not uncommon in the investment banking industry. Those responsible are very seldom held accountable in these frauds, but investors are as settlements, fines and legal fees amount to billions in corporate costs.
Low interest rates are making normal banking activities less profitable while banks are pressured to show increasing profits and with this pressure they are taking larger risks. Those that are trading derivatives are not squeaky clean; in fact many have a long list of wrongdoing that looks much like criminal activities.
It also seems possible banks could be trading derivatives at levels much higher than they are reporting and cooking the books to show gains elsewhere. Trading levels in the past quarter were over 79 billion shares lower on the New York Stock Exchange than the previous quarter which was over 167 billion shares lower than the quarter before that, yet they saw increased trading profits on this vastly lower volume of trades?
Past practices of allowing those responsible off the hook with no real punishment make it seem likely they will continue to lie and take large risks. Claims of ignorance of these trades are unrealistic, or at the very least show gross negligence and derelict of duties under Sarbanes–Oxley. Allowing expenses and fines to be pushed off on investors makes Sarbanes–Oxley and Dodd-Frank look like meaningless acts. Yes, it seems possible trading in derivatives could still be a problem.
Excluding the current month since it has not yet finished, since rebounding from the summer retreat in October 2011, the S&P 500 saw 30 months finish with gains and only 12 finished with losses. Since July 2014 it has seen five finish with gains and six with losses. After that retreat the index has seen half of the monthly losses since October 2011, in a little over a quarter of the total time.
This increased volatility coincides closely with resistances in the 2000 to 2140 range. This period began with the first significant pullback from the likely resistance in the lower half of the 100 L at 2000 from July 24, 2014 intraday high of 1991.39. It also began after the index pushed above the upper trend line from crash lows.
Volatility on the S&P 500 has increased even further since Dec 5. The index has seen three significant drops and several significant price direction changes while within these drops. This same increase in bearish volatility is seen prior to large retreats in many market tops.
Earning reports are beating current estimates, but many are reporting drastically reduced earnings. The index constituents could see a double digit earnings percentage decline from the previous quarter. Earnings declines are widespread, affecting all sectors. Higher P/E’s than the index currently has have been seen in the past, but most of these higher P/E’s were seen into an earnings slide like that currently being seen on the index. Unless the index retreats as higher earnings quarters drop off and are replaced with lower earnings into the current higher stock prices, it seems possible P/E’s near these historically high levels could be seen later in the year.
The index has seen a reduction in active indicators over the past few weeks. Other indicators show the potential of becoming dormant. A reduction in active indicators is generally a bullish indication. At the same time most supporting indicators continue to suggest bearishness. Even if all other remaining indicators should become inactive, the –/(+) 90 D indicator will remain active. It continues to show potentially bearish characteristics.
The world applauded a possible bailout deal with Greece, but the plan was not approved by Greece and rightly so. This plan only kicks the can down the road and allows a manageable debt default to grow to unmanageable levels. The current plan is the same as the old plan, which did not allow economic growth. The old plan allowed Greece’s debt to balloon and it will surpass the levels seen prior to 2012 private debt restructuring later this year. Greece will eventually default under the current plan; the plan leaves no way for them to repay this debt but instead traps them with an ever increasing debt level. If the Euro leaders are not willing to listen to reason and allow some concessions for economic improvement to allow the tax base to grow so Greece can repay debt and become solvent, it is probably better for Greece and the rest of the world to let this default happen now, instead of in the midst of a large downturn from a much higher debt level.
Runs higher in the past year appear to have left a higher than normal number of open gaps higher. New gaps continue to be made and a few have been filled. It is likely gaps left open will eventually be filled at some point.
Many of the stocks that appeared to rebound from lows too early previously appear to have repeated this move. A retest of previous lows seems likely; a break of these lows probably falls much deeper. Many of these stocks are still very expensive based on likely future earnings. Many of these stocks beat the current estimate with this report, but reported earnings well below the estimate of two months or less ago.
The index is nearing the “Sell in May” period. An earlier article on this subject shows that buying the low in May and selling a rebound afterwards usually provides very good returns. It also shows that in many years waiting until September to buy resulted in buying higher stock prices as decreases were seen only about 45% of the time. Current earnings make it seem possible this year could be one of the exceptions though.
Although the S&P 500 has yet to fall as expected, stocks in runs higher that were once fixtures in carrying the index higher continue to falter and the tip over pattern continues to develop. Fewer stocks are left in these runs higher, and many of them that continue are running far ahead of likely future earnings. As fewer and fewer stocks remain in these runs, the weight of those moving lower is likely to overcome the dwindling numbers moving higher. Conditions appear to be developing that could be very punishing to stocks that appear overvalued.
The index has rebounded from a seventh significant drop since breaking above the upper trend line established early in the rebound off crash lows. Past breaks above the upper trend line on the S&P 500 have all produced large retreats that reach the lower trend line or lower support line at some point. It is not uncommon for the index to see one or more significant drops before seeing a retreat to one of the two trend lines. The index initially broke above the upper trend line on Dec 26, 2013 and has seen five of these significant retreats since July 2014, and three since Dec 2014.
If the index continues in past patterns, runs above the upper trend line have always fallen back to or below the lower trend line or lower support line within two years. The only exceptions were during trend changes, but these trend changes also occurred during a rebound from a drop to one of these two lines. The index returned to the prior trend from the last drop to one of these trend lines, so it does not appear to be in a trend change from that rebound. It therefore seems likely a break to the lower trend line or lower support line could happen within the next 8 months. Chart formations make it seem fairly likely it could occur sooner rather than later.
Approximate levels of the lower trend line at the beginning of this month are as follows: On April 6 it was at about 1805.
Approximate levels of the lower support line at the beginning of this month are as follows: On April 6 it was at about 1659.
It seems likely the breaks lower seen in commodity prices could continue for some time to come. Although the stock market currently perceives it as such, a rebound in crude prices is not a bullish indication.
Ultimately the direction that the stock market takes from here could be influenced by news events. It seems possible some of these news events could involve normal market conditions due to the time of year. It also seems possible current conditions could cause past problems to resurface.
When the S&P 500 broke above 2000 it entered a level research suggests could contain a large pullback. Data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.
When these potential drop levels were first discussed, there did not appear to be a catalyst for this large drop. Since that time the commodity super cycle appeared to collapse, and this collapse has sent earnings levels much lower in a large portion of the index. The dollar also rebounded considerably and this too brought foreign earnings potentials lower in many of the constituents. These lower earnings also had a ripple effect, first sending earnings lower in other constituents that supply these sectors and now in sectors that are feeling an earnings pitch due to spending reductions caused by these reduced earnings. Although many companies are beating current earnings projections, it seems likely the index could see earnings fall by double digit percentages quarter over quarter.
As a result earnings reductions over the past ten months have been large and widespread. The S&P 500 constituents are projected to see earnings declines in the first two quarters. Although a weekly rebound was seen in current year earnings, it seems possible this projection could continue to slowly retreat.
Many companies reported double digit percentage declines in earnings in both the fourth and first quarter earnings. These declines continue to appear to go largely unnoticed as reduced earnings projections were beat, giving the illusion of a great earnings quarter. Some companies are doing well, but most are not.
Economic conditions leading into earnings for the first quarter made it seem possible earnings could be worse than expected in several sectors. These earnings problems appear to be continuing and it seems possible the second quarter earnings may not be as good as currently expected. It seems possible earnings problems could spill further beyond the second quarter. Many companies have since reduced revenue and earnings guidance. Current year projections have slipped in nearly every week this year, not just in commodity or currency exchange cases, but nearly across the board. Some companies could still do well, but many of them are arguably overpriced already.
These lowered earnings again appear to be hidden by a large number of companies beating drastically lowered expectations. A large number of earnings consensus changes have been made recently and most of these changes have been lower. Many of the stocks that have reported so far beat the estimates when they reported, but missed expectations of four or less weeks before. Some that beat estimates saw earnings projections slide in excess of 50% during the two months prior to these reports.
Lower commodity prices and a stronger dollar are actually bullish for longer term earnings growth, but the positive effects of these changes are slow to develop. Many expected these increases to be seen immediately, but they were not. They are not likely to be seen in the first quarter earnings either; many reports make it apparent that consumers are not spending recent fuel savings, but saving them. The good news is savings are rebuilding, making future spending increases seem more likely. Provided fuel prices remain moderated the spending increases are still likely to be seen, just not as quickly as most expected.
In the meantime earnings are likely to suffer. It seems likely investors could lose confidence into these continued earnings disappointments. Many stocks are trading well forward of current earnings expectations and if these earnings are not increasing at rates they feel comfortable with, eventually profits will be taken.
It has been noted in recent articles that volume levels seem nearly inversed from normal patterns. Instead of volume levels decreasing into market rebounds, they have increased to levels normally seen in bearish retreats. Instead of volumes increasing into bearish retreats, they have fallen to near levels normally expected during bullish rebounds. It seems possible the higher volumes into market moves higher and lower volumes into market moves lower could mean that selling is increasing into market highs, and the normal buying patterns into market lows are absent. It seems possible market movers are shedding positions. Quarter over quarter volume level decreases has also been seen.
To this point the largest downturn of the four after the index reached the 2000 level was seen in a fall to the Oct 14, 2014 low from a pullback within the 100 L at 2000. That retreat did not reach the levels that could have relieved the index of a possible deeper drop. Yet the index has seen a continued development of the tip over pattern, which makes a deeper drop seem likely.
The index reached a significant level in the retreat from likely resistance between 2112 and 2125 in the upper half of the 100 L. The index recovered from this significant drop in the past week. Like the resistances found in the 2065 to 2070 MRL and lower half of the 100 L at 2100, the upper half of the 100 L appears to hold resistance stronger than originally anticipated.
Chart formations tend to make a fall in excess of 10% seem possible. Past chart formations seen during large retreats on the index closely match those that are present now. It continues to seem fairly likely a significant fall could reach the lower trend or lower support line with a move lower probably staying within the 10% to 20% range. If a drop to crash potential is seen, it probably does not exceed 24% by much, but could possibly reach 35% if many of the constituents fall to lower support levels. Research suggested if a crash were to occur from within resistances in the 2000 to 2140 range, it probably finds bullish support somewhere near the two previous tops in 2000 and 2007. The index’s highest close finished slightly greater than 26% above the 2007 high.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. This resistance has the potential to cause a significant pullback. The potential for these drops could change drastically depending upon the outcome at the lower resistance and being so no drop projections have been made for this resistance at this time.
Reasons to become bearish appear to be increasing as time progresses; even so the longer term seems bullish. The index continues to show patterns that are common prior to large retreats. If a large pullback is seen on the index, it could be prudent to increase stock holdings into this drop.
If gold should rebound into a large sell off in stocks, it could provide the best remaining opportunity to take profits in gold holdings. If stocks rebound strongly from this downturn as it seems fairly likely they could, it seems possible gold could shatter support at about 1190 in this retreat and might not find solid support again until near 700. A drop directly to this level seems unlikely and gold probably finds temporary support in the 900 to 1000 range before slipping lower. Ultimately, even the support at 700 is likely to fail with gold probably returning to the 200 to 300 level at some point in the future.
The recent break below 1190 is concerning. Gold has rebounded from a drop below this level before, but a break below support seen in these previous retreats could signal a larger decline.
These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with a high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull. Many chart formations that occur near large pullbacks became apparent as the index neared this resistance.
Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.
Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at AOL Finance. Earnings information was gathered from Yahoo Finance, CNBC, Edgar Filings, Scottrade Elite, AOL Finance and Morningstar, although other websites may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com or from those that Ron created from his data. Gold charts used for analysis and commentary were provided by Kitco.
Have a great day trading.
Disclosure: Ron currently has investments in BAC and MS. He has no investments in JPM, WFC, GS, or C. Ron is currently about 56% invested long in stocks in his trading accounts reflecting a reduction in his investment level during the week. This decrease was the result of the addition of one issue with the cost more than fully offset by the sale of two issues and dividend payments. Ron feels he is overbought given current market conditions and it seems likely he will continue to sell into any market strength. Ron will receive dividend payments from 11 issues in the coming week and one in the following week. Ron noticed about a week ago he had sold all issues that normally pay dividends in the following week. The above purchase pays the lone dividend in the coming week and was purchased to preserve and extend a string of weeks with at least one weekly dividend payment. The streak will reach 306 weeks with that payment. If no further investment changes are made during this time frame, these dividend payments would not change his rounded investment level.
Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.